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Michigan's debt is trailing the municipal market by the most in two years and its borrowing costs are rising relative to similarly rated states as Detroit's bankruptcy filing shakes investor confidence.

Bonds of Michigan and its local issuers have lost 3.4 percent this year, exceeding the 3.1 percent decline across the $3.7 trillion municipal market, Barclays Plc data show. For Michigan, it's the steepest drop since at least 2005.

Detroit's filing, a record for a U.S. city, may raise borrowing costs for Michigan governments as investors demand extra compensation, Jeffrey Rosenberg, chief investment strategist for fixed income at BlackRock Inc. in New York, said in a Bloomberg Television interview. The world's biggest asset manager oversaw $3.86 trillion as of June 30.

"This is very specific to Michigan," Rosenberg said. The governor's approach "is very different to what other states have done, and that will certainly have an impact on Michigan."

The move by the state's largest city follows bankruptcy filings in Jefferson County, Alabama, and the California cities of San Bernardino and Stockton. Detroit has $18 billion of debt, according to Kevyn Orr, the city's emergency manager.

Orr, appointed by Republican Governor Rick Snyder in March, sought protection for the city under Chapter 9 of the U.S. Bankruptcy Code to deal with the debt and long-term obligations. In a statement, the bankruptcy lawyer said he had "no reasonable alternative" to the court filing.

After Illinois and California, Michigan general-obligations offer the most additional yield above top-rated munis among the 17 states tracked by Bloomberg data. Yields on Michigan's general-obligation bonds maturing in 10 years were 0.34 percentage point higher than an index of benchmark munis as of July 18, Bloomberg data show.

Michigan's yield spread over New Jersey, with the same AA- grade from Standard & Poor's, has averaged 0.19 percentage point since the start of May, compared with 0.1 percentage point for the first four months of the year. The gap reached as wide as 0.39 percentage point in May, the highest this year.